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Report

Renewed US-India Climate Cooperation

Mobilising Foreign Capital for a Green Transition in India

Kanika Chawla, Alan Yu, Rita Cliffton
February 2021 | Renewables

Suggested Citation: : Chawla, Kanika, Alan Yu, and Rita Cliffton. 2021. Renewed U.S.-India Climate Cooperation: Mobilising Foreign Capital for a Green Transition in India. Washington DC: Center for American Progress

Overview

The report, published in collaboration with the Center for American Progress, discusses the need for making Indo-US climate cooperation as the a central pillar of the strategic partnership between the two countries. It identifies the barriers, including the critical role of investor risk assessment, dampening the flow of private finance for accelerating India’s green transition in energy, mobility, energy efficiency, manufacturing, sustainable infrastructure and climate adaptation. Further, it discusses the enabling role that the Indian government can take in identifying prioritised green sectors for investment flows. Finally, it proposes strategies that the Indo-US cooperation can adopt to derisk the sectors identified and rapidly catalyse private investments required for India’s green transition.

 

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Key Highlights

  • Financing for green infrastructure lags, market failures serve as barriers to investment, and new economic uncertainties could complicate investor confidence in India. It is in this setting that governments must create new means to catalyse investment flows.
  • Implementing the pledges India has made under the Paris Agreement such as a series of actions on carbon intensity, power sector decarbonisation, and carbon sinks would require USD 2.5 trillion in finance by 2030. With increasing ambition, the total investment opportunity keeps growing, making capital mobilisation at scale critical and daunting.
  • India’s high risk rating acts as a deterrent, shrinking the available capital pool by excluding some institutional capital and investors and generating higher risk premiums, limiting the affordability of capital.
  • India’s green transition offers opportunities to US institutional investors, holding USD 26 trillion in assets as of 2020, and increasingly prioritising environmental, social, and governance (ESG) considerations.
  • The most prevalent sector-specific and country-level investment risks are: off-taker risk of power-producing counterparties failing to comply with contract terms; risk from lower-than-forecasted energy and electricity demand; change-in-law risk; and foreign exchange risk due to emerging market currency fluctuations.
  • India’s green transition financing needs go beyond power generation. India must identify priority green sectors. This requires a strategic green industrial policy that identifies and sequences national priorities, sets clear targets, displays long-term vision, and rewards innovation.
  • Catalysing finance flows will be a critical factor for new and underserved segments of India’s green transition, such as electric mobility. The overall EV consumer market in 2030 could be as large as $206 billion cumulatively. For the auto loan market the banking sector would need to more than triple its current advances of $31 billion toward vehicle loans over the next 10 years in order to achieve vehicle electrification goals.

Key Recommendations

  • Prime Minister Modi and President Biden should agree early in the new U.S. administration on a high-level strategy to mobilise international capital flows.
  • The Indian government should launch a process to identify prioritised green transition sectors for investment. The two governments must then focus on a comprehensive strategy to de-risk the investment environment for those prioritized sectors.
  • The leaders should set clear and ambitious timelines and performance standards.
  • Foster joint interventions and mechanisms focused on deepening green finance markets in India and developing functional and mutually beneficial interlinkages between US private capital and India’s green investment opportunities.

Cooperation on mobilisation of foreign institutional finance should be a central component of the U.S.-India climate cooperation agenda. A reinvigorated program of climate cooperation can serve to demonstrate to the respective countries and the world a shared commitment to jointly transition to a lower-carbon development pathway.

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